1/24/97 -- 4:38 PM


NEW YORK (AP) - The dollar vaulted over the 120-yen barrier for the first time in nearly four years Friday then dropped, hurt by fear that Japan's central bank was selling dollars to defend the yen.

The dollar retreated against other major currencies due to profit-taking on the U.S. currency's sharp rise over the past week and on news of higher inflation in Germany, which further dimmed hopes of lower German interest rates.

It was the first broad pullback in the dollar in more than a week. But traders said the currency still was likely to go higher on the basis of a stronger U.S. economy vs. weakness in Japan and much of Europe, the same forces driving the dollar up for the past several months.

``There are still plenty of buyers for the dollar,'' said John McCarthy, foreign-exchange manager at ING Capital Markets Inc. in New York. ``I don't think anything's changed.''

The dollar traded as high as 120.13 yen in intraday dealings, the strongest since mid-February 1993 and the sixth straight day that the dollar has hit a nearly four-year high. But its subsequent drop left the dollar at 119.00 yen in New York, down from 119.47 yen Thursday.

The dollar also fell to 1.6284 marks, down from 1.6366. The pound cost $1.6308, up from $1.6292.

Even with the pullback, the dollar still ended the week 2.7 percent higher vs. the yen and 5.6 percent higher against the mark compared with its value at the end of December.

Traders initially bid up the dollar against the yen in Asian dealings after a senior Japanese economic official said the yen's weakness wasn't aggravating Japan's inflation rate. Shinpei Nukaya, a vice minister of the Economic Planning Agency, told reporters there was ``no big demerit seen'' from the yen's drop.

But when the dollar hit 120 yen, rumors swept the market that the Bank of Japan was selling dollars, despite indications in recent days from the Japanese central bank that it would refrain from intervening in the foreign-exchange market to defend the yen.

There was no firm indication that the Bank of Japan was in the market, and its officials declined to comment. But the timing of the rumor after more than a week of solid dollar gains was seen as an excuse to sell the dollar.

``It just got people running for the hills, so to speak,'' said Joseph Pedone, a currency trader at the New York branch of Japan's Dai-Ichi Kangyo Bank Ltd.

The dollar's retreat against the mark partly reflected news that inflation in three of western Germany's four biggest states accelerated unexpectedly last month, further dimming hopes for an interest-rate reduction in Germany.

German government data released Friday also showed that import prices in December rose sharply vs. the month before, suggesting that the mark's weakness was causing higher prices.

The German inflation news came one day after the Bundesbank, Germany's central bank reported that the nation's money-supply growth grew faster than envisioned in the last quarter of 1996, another inflation warning.

Other late dollar rates in New York compared with late Thursday: 1.4044 Swiss francs, down from 1.4208; 5.4860 French francs, down from 5.5185; 1,600.00 Italian lire, down from 1,600.01; 1.3488 Canadian dollars, up from 1.3446.

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